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1099-Q and 10% additional tax question... about Exceptions in TTB

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    1099-Q and 10% additional tax question... about Exceptions in TTB

    I have a client that withdrew lots of $ out of the 529 education plan. He ended up receiving more scholarship money. After all room and board expenses, and books and supplies expenses. And after reducing his Tuition by the Scholarships, he has more money than expenses because he took out too much of the 529 plan. He ended up using that money to pay off his car.

    So in my research for eliminating the 10% penalty.... in the Tax Book page 12-7 at the top is Exceptions to 10% additional tax-Education. One thing listed is:

    Included in income because the designated beneficiary received tax-free educational assistance.

    Does his scholarships count as tax-free educational assistance?

    Just wondering if he is subject to the 10% penalty or not.

    Thanks for any input...I just don't want to interpret it wrong.

    #2
    I don't think the penalty will apply, but you can have a look at Pub 970, p. 61, where your situation is discussed.

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